Infrastructure Investing On the Job: Private Equity Lite, or Modeling Like a Mega-Fund?

We pick up today with Part 2 and do a deep dive into what you do on the job, a day in the life at an infrastructure fund, what modeling and deals consist of, and yes: the pay, hours, and all the stuff you actually care about.

Besides just being a “hot” sector, infrastructure investing has other attractive attributes as well: the ability to earn PE pay with improved hours, for one.

Read on to find out why and how that’s possible and what you can expect after you land your offer and start working:

A Day in the Life

Q: So how close was the job description to what you’ve actually been doing at the fund?

A: Pretty close. Just like traditional PE, it’s a mix of deal execution and managing existing assets. Since it’s a smaller fund, everyone here does a bit of everything.

I’ve spent a fair amount of time reviewing investment memos, submitting bids for good opportunities, reviewing data room documents, and modeling cash flows from assets, but I haven’t cold called managers of power stations or anything like that.

Occasionally, we’ll participate in banker-run auction processes but we try to avoid them when possible because they tend to drive up prices and make it more difficult to hit our targeted IRR.

If we decide to pursue an investment, there’s still an internal approval process and investment committee just like at traditional funds.

So the deal execution process is not that much different, even though the technical work can be.

One difference is that we use a lot of external advisers on everything from verifying that the asset we’re investing in is functional to whether the compliance requirements are met to the insurance on the asset.

Cost overruns on these projects can easily wipe out returns, so it’s important to carefully review and understand the clauses in the project documents to make sure those are covered.

As one example, a wind farm in Australia that we invested in ran into problems because the company responsible for the concrete foundation did a bad job and the project has been delayed – but under the engineering/construction contract, we can claim damages on that and at least get some money back.

Q: So you do also develop new assets (“greenfield”), similar to Project Finance?

A: Occasionally, but it’s rare due to the higher risk associated with them. Just like with real estate development, building new assets is always riskier but the returns and your own compensation won’t necessarily go up in proportion to that risk.

We also need to get Engineering Procurement & Construction (EPC) contracts in place to reduce some of this risk and protect ourselves from scenarios like what I just described.

Q: I see… so you’re still very focused on acquiring existing assets, but occasionally you’ll do a greenfield project.

What do juniors at your fund do in terms of “portfolio management”?

A: Everyone here gets assigned a few assets to monitor, and we estimate cash flow distributions, update the financial models on the assets, and prepare quarterly updates for investors.

We also run an independent valuation process every 6 months, which involves giving some of our data over to an external firm to “audit” our portfolio and make sure our assumptions are reasonable.

Almost all the assets we purchase have a debt financing component as well, so part of the job involves monitoring that and deciding if debt needs to be refinanced or if there’s a danger of the covenants being breached.

Q: Great. And what about the fundraising side?

A: We’re actually in fundraising mode right now and we’re going after new LPs, preparing pitches, and responding to requests from investors and asset consultants for more information on our performance and strategy.

Not too much is different process-wise, but, as you’ll see soon, the presentation of deals and the quirks of the Australian market make for some differences in working with LPs.

Infrastructure Modeling: Crazy for Cash Flows

Q: OK, I know you wanted to mention a few points about that at the end, so we’ll skip it for now and move onto technical skills and modeling.

Revenue and expense projections are fairly simple and you usually just assume they increase at the rate of inflation or some other low percentage.

Most of these assets have operating & maintenance (O&M) contracts that spell out the key terms and tie costs to inflation as well.

There’s a bit more modeling involved on the debt side because we look at different demand / inflation / interest rate scenarios, and how IRRs and cash flow yields change under all of those.

Q: OK, so let me stop you right there to clarify something. You mentioned in Part 1 that your targeted IRR is 10-15%, but you also just said that revenue and expenses only increase at a low percentage each year (maybe 3-4%?).

How is it possible to get a 10-15% IRR under that scenario? Operational improvements? A very high amount of leverage?

A: Hah, good question. There could well be “turnaround infrastructure funds,” but there’s limited room for operational improvements with most of our assets because of the fixed, long-term contracts in place.

If you can’t reduce the expense profile or increase revenue, the returns have to come from either multiple expansion or additional leverage – in Australia specifically, there have been cases of multiple expansion due to the commodities boom and increased demand for infrastructure (though that obviously won’t last forever).

Investments can be highly leveraged (e.g. 80:20 Debt:Equity ratio, far above what you see in most non-bubble leveraged buyouts).

And these investments are far from “risk-free” – a cost overrun, construction delay, contract cancellation, etc. could all cause problems down the road. So a potential IRR far above bond yields is not unreasonable.

One reader also mentioned that for some “low risk profile” assets such as standard schools or hospitals, leverage of up to 95% is possible, even post-ongoing-financial-crisis.

Cultural Considerations

Q: Great, thanks for explaining that one.

Can you tell us about the culture at your fund?

A: It’s much more relaxed than in banking, where you see a lot of high-stress situations and people running around constantly catering to clients’ needs.

We have several offices in Australia, and everyone sits together in the same area with no separate offices or glass doors or anything.

No one here stays very late, so you don’t see the kinds of “late night socials” that are common in banking when everyone is there working until 2 AM.

Q: Right, so much better hours overall … 50-60 per week?

A: Closer to 50 I’d say – the average day starts at 8:30 AM and goes until 7 PM or so. I haven’t worked a single weekend since I’ve been here.

When deals heat up we can get busier, but we haven’t done any massive deals since I’ve been here – mostly just smaller investments that haven’t involved killer hours.

NOTE: Again, based on comments left on the previous article, hours can creep up toward IB hours when a deal is near the finish line – one reader from Canada also mentioned that he works more like 10-14 hours per day on average.

So this one depends on the region as well, and the hours in other markets may be worse overall.

Q: And do you get to travel and see any of these toll roads / bridges / power plants in-person?

A: Sometimes you’ll do site visits, but it’s very difficult to really evaluate these types of assets unless you’re an engineer.

In traditional PE, you can go visit a company, speak with management, observe customer interactions, and get a sense of how the company operates even if you don’t have an operational background.

But here, we usually have an engineering firm look after assets, send us monthly operational reports, updates, and so on, so we’re more removed from the operational side.

Q: You also mentioned that your firm hasn’t done many big deals lately.

Any reason why? It seems like “mega-deals” are making a comeback in the traditional LBO market.

A: For one, the capital raising environment has been tough lately and lots of pension funds here are increasingly doing their own investment work in-house.

They look at infrastructure funds and say, “Well, why bother investing in your firm and paying the fee when we could just build our own internal team instead?”

Over time, they’ve gradually shifted from putting money into infrastructure fund managers to co-investing to now bringing everything in-house. And in Australia, because of the mandatory pension contributions across the population, they have the resources to do large deals.

I am not 100% sure of the specifics on how it benefits them, but I believe they get a tax advantage or have a cost of capital advantage or something like that and can therefore afford to out-bid local firms.

So, bottom-line: when fundraising is increasingly difficult and valuations keep getting bid up, you don’t do too many large deals.

Getting Paid and Moving Up

Q: Yeah, that makes sense. Now I have to ask about the compensation – is it in the same range as traditional PE?

A: Actually, yes. Base salaries here are in the $100K USD range, with matching bonuses, so all-in pay can be around $200K for junior associates, with more than that if assets perform well and we get higher performance fees.

The fee structure here is more like “1 and 20” rather than the 2 and 20 you see at other PE funds, so you’d think that pay would be lower, but that hasn’t been the case so far (pay at the senior levels may be lower, but I’m not sure about that).

Base salaries have actually gone up a bit since I started working here.

Also, our fund is currently indexed to something that’s completely inappropriate (i.e. an index that has returns much higher than 10-15%), so that limits our additional bonus / upside from performance.

But if that ever changes, or if there’s a true “boom year” where you earn much higher returns, there’s potential for even higher pay.

NOTE: Again, based on the comments left on the previous article, the pay in Australia seems to be different from other regions.

One reader in Canada mentioned that bonuses there were more like 30-60% of your base salary rather than 100%, but that you might get some carry starting at the Associate level depending on the fund.

So don’t walk in expecting your bonus to be 100% of your base salary, as it depends on the region and fund.

Q: PE pay with even better hours, at least in certain regions… I like the sound of this.

I’m guessing that most people don’t even move on or want to go elsewhere, since it sounds like a great opportunity.

A: Pretty much. Turnover is very low here – some people have been here for 5+ years, which is almost unheard of in investment banking and is pretty rare even in traditional PE or hedge funds.

There isn’t a strong incentive to leave because there’s good work-life balance and the pay is solid.

If you did want to move on, another infrastructure fund, a power / utilities group, or even Project Finance might be possibilities.

Q: Great. So what are your future plans?

A: It’s difficult to move around in the Australian market because there aren’t that many funds here, and I’ve been happy so far so I have no real reason to leave.

Pension funds might be interesting in the future, especially if they continue to build out their in-house teams.

I’ve also thought about going overseas to work in the US or UK since they’re both much bigger infrastructure markets.

But all of that is a long ways away – for now, I need to focus on completing the CFA!

Q: As I cringe in horror at what you just said.

A: Haha, yeah, I realized it’s not particularly useful in this sector but I already signed up… so might as well follow-through on it.

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

Comments

I’ve been offered a position at a global infrastructure investment fund, but it’s with their asset management team (I.e. Managing their investments in PPPs post financial close and divesting of their investments).

They’ve sold it to me as a chance to develop very strong commercial skills that will help me originate deals in the future, but I’ve heard that originations teams look at their asset management teams as back office.

What I really want to do is investment originations. Is it true that asset management to originations is a difficult path? Do many people make that transition?

Commerical skills are important in a P3 deal. I would say it is a good opportunity if you are not currently in project finance. It’s important to get your foot in the door and get exposure to the P3 market first, and then you can learn to model on the side and try to pivot to the finance group.

Getting into infrastructure PE would be tough if you have a credit background. Project Finance would be more feasible. Try to spin your experience to sound as PF-related as possible (e.g., focus on describing loans related to real assets) and then reach out to banks and groups that you have worked with before or that know your current firm. It’s 100% about networking (LinkedIn to find information, email to contact the person).

Because the CFA has nothing to do with analyzing infrastructure investments. The CFA is very broad and theoretical, while infrastructure is specialized and practical (the CFA won’t teach you how to model revenue from individual contracts for a power plant or bridge, for example).

Uh… pretty much every company beyond a certain size gets audited. It’s a way of cross-checking assumptions and accounting, since one party may do something that is acceptable in their eyes but which is not reasonable to someone else. I’m not sure how much you know about valuation, but it’s far more art than science, and it requires plenty of subjective judgment calls. So an audit of portfolio companies’ valuations happens not because the team “can’t crunch the numbers,” but because they want to do a sanity check of their internal processes and assumptions.

I guess you could do that, but you wouldn’t look quite as appealing for VC if you have experience in infrastructure investing since the criteria and process are so different… you could probably get into VC anyway, but I think you’d have a pretty tough time telling a convincing story with 4-5 years of experience outside TMT.

I’d say yes it is possible, though you’ll have to demonstrate your ability to understand other industries. In terms of breaking in, this is a broad question, and hard to say without knowing your background. I’d suggest that you connect with GPs in other PE funds for informational sessions first, and then see how that goes.

What would be the process for breaking into infrastructure investing from a post-MBA associate position at an IB? How many years should you have under your belt before you can jump (assuming the associate position is the only exposure to IB, i.e. no previous analyst experience)? Also, what if you’re not in Power and Energy, but in another coverage group like Consumer/Retail or Industrials? Thanks for this!

You should aim to move over as quickly as possible, because the longer you stay in IB the harder it is to move to buy-side roles. So I would say a year or two, at most, and beyond that it gets quite tough. Wait til you have at least a few deals to speak about, which should happen within your first year if all goes well.

From another coverage group it’s possible, but you just have to learn about power/energy on your own (see if your bank’s group can share anything with you).

I think networking with bankers is probably better than approaching recruiters. I’d say you can use both approaches, but networking with bankers is probably best if you were to choose one over the other.

I have just been offered an analyst position at a real estate fund. It is institutional manager type so it mostly acquires (prime) income producing assets. There will be much less value-add activities (development, retrofit, etc.) compared with what REPE does. However, it seems like the job is more stable and hours are decent (9-10 hours a day). The fund is very well known in the real estate industry. I have not negotiated the pay yet, though I believe it will be 55k-60k + 20% bonus. Mind you that I live in middle of nowhere and from the cost of living in this city, I expect to save 15-18k with that salary after taxes, which I believe is pretty good for first year analyst. The compensation structure is compelling as well. From what I heard, the base will increase about 5-10% a year and bonus will be between 20-25% in the first 3 years. So I definitely won’t make IB analyst salary but I can reach 6 figures in 4-5 years.

On the other hand, I interviewed with a newly founded infrastructure fund and it looks like it is a good opportunity as well. It will be in a major financial hub and the pay is pretty much the same as the real estate job. In fact, it may be even lower due to the fact that they only have about 100M AUM (but the founder has good records and he led one of the biggest infrastructure funds in N/A before so I think they can raise capital easily). The job seems to be very demanding as I was told that they expected 12-14 hours a day.

I love tangible assets and both real estate and infrastructure seems to add a lot of values to the society, which is what I really care about. I plan on getting an MBA in 4-5 years and I did not go to a target school so the work experience will be my strongest selling point on the application. Money is important to me since I have quite a bit of student loans to pay off but I can choose not to buy a car in 3-4 years so I can work around with the money issue. What I really care about is the nature of the work (whether I can add a lot of value along the way, or I can contribute to the operational side in order to help boost returns) and the effects of my work on the society.

So I would like to ask whether the infrastructure or the RE offer is better in term of medium term to long term growth? Given the RE will be conservative type investments, will I be able to contribute/add more value to infrastructure investments?

Good questions. I don’t think you’d go wrong either way. You mentioned cost is an issue – if the cost of living is lower at the first role and your take home pay and savings are higher, I may go for that one. With the above being said, my first initial reaction was that the second one may offer you better exit opportunities, connection (in a financial hub), and room for growth given its a new fund and the founder’s track record, which is very important. If you’re ultimately interested in infrastructure investments, I’d go for the second option, though you may have to negotiate pay down the line, assuming you do a good job, which shouldn’t be a big problem.

Below are the answers to your questions based on my personal experience:

1) In general yes. You should expect modelling questions. Even though you might be spending 70% of your modelling time reviewing models built my bankers, there will be some times where you will be modelling your own model

2) At the associate level, you are expected to understand modelling and be able to work on models

Thanks for the second part of this interview, very informative once again.

I had to giggle regarding the comment regarding the UK and the US. While definitely true (although US is developing and in the UK PF2 still has to prove itself), I in Germany envy the Australian deal pipeline and general size of the infra market. Though this might be more from a greenfield POV and I have no clue about the activity in the secondary market in Australia.

I spent 6 years working at a law firm in SE Asia advising on infrastructure projects (mostly power) and related M&A. I’m headed to a top 15 B school in the fall where I will be focusing on learning as much about finance and accounting as I can (in addition to working through the BIWS courses). What do you think my chances are to land a spot at an infra fund in Asia without the IB experience but with the sector specific legal experience and industry contacts?

It may be challenging to break in without the IB & finance experience since you’ll be competing with people who have had experience in the industry, though your legal experience and contacts can be useful to the funds. I think your MBA can help you retool your background, so I’d focus on honing your finance skills at school, network and try your best to demonstrate your finance aptitude in interviews.

With the recent boom in commodities you mentioned, I wonder if the pay and work/life balance that you enjoy in Australia might gradually return to the mean, especially with what you mentioned about the increasing use of in-house teams.

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